Friday, June 27, 2014

The IPO is not Dead Yet: a Rejoinder

I don't mean this to sound as obnoxious as I know it will, but it's hard to find an economically literate venture capitalist. Let me explain.

Economic literacy is not the same thing as financial literacy, not by a long shot. Economists pierce the illusion of money to study the underlying phenomenon of the exchange of value. If you've taken a graduate course in microeconomics or game theory, you'll recognize this habit in all those equations that use derived utility in lieu of cash. Even in undergraduate courses, you'll very often hear philosophical musings on what money is, how money differs from currency, how income differs from wealth, and even more fundamentally, that the beans you use to reckon accounts are nothing more than social agreements: implicit claims on one half of a (eu)voluntary exchange. Economics is a philosophical discipline. Yes, it's more practical than metaphysics, more earthy than epistemology, more stubborn and piggish than aesthetics. Despite that, it's still devoted chiefly to answering not-obvious questions about the hidden treasures of human existence.

Financial literacy, contrarily, is a matter of arithmetic. The two are related in that the topic of study is relative prices, institutions, and exchange, but finance studies the metrics exclusively, without fussing about with all the underlying utility arguments. And well that it doesn't. The philosophical underpinnings of trade, how true (not merely measured by bank account balances) wealth is generated, and how it is that people can be richer (happier, more fulfilled if you prefer) merely by reshuffling ownership over an existing stock of physical stuff—distracts the financier from the important business of probabilistic bean counting (the important difference between accounting and finance is timing: accounting is what you do after the fact, finance is what you do before the fact). Venture capitalists have an advantage in thinking carefully about the details of their business, the regulatory landscape, and the sorts of stuff people are likely to want to buy in the near future. However, they earn no beta, no additional returns, for thinking like a philosopher or an economist (and thank goodness for that).

So bear in mind that when Andreessen kvetches about Sarbanes-Oxley, the practical outcomes he identifies are financially literate. The econo-philosophical side would be keen to point out that stock market investment at its finest is democracy in action, where anyone with a little gumption and a few bucks in their pocket can signal that they believe in a firm's ability and willingness to serve customers. Investment is a way for anyone (of sound mind and majority age) to participate in the grand ballet of mutual benefit and service. Andreessen's worries about business volatility, quick-cycle rumor mongering, and dogfights between short and long sellers are symptoms of interference, but the cause is ultimately ideological and cultural. Constituents have ceded their sovereignty over trade in financial instruments to what Adam Smith called "men of system." The stock market is scary, so the median voter is comforted by the phantasm of stability brought on by the SEC, FTC, BCP, etc, etc. Lee extracts from Andreessen Bastiat's knell: the unseen results of this severe meddling is wretched de-democratization of the process of supporting new ventures.

On the bright side, Kickstarter and similar services have re-introduced little-d democracy back into the world of innovation. One of the great things that's happened in my lifetime is that creative people now have the ability to directly petition fans and potential customers for support. To me, that's precisely what the old-timey clickety-clack stock market is for. The noticeable difference is that instead of full-page IPO spreads in the WSJ, kids with cool ideas now make heartfelt (if formulaic) videos and publish to the Web. This I like. A lot. It's the new IPO.